Consumption Volatility, Consumption Growth And Economic Fluctuations

It is not consumption but investment and export that have dominated the economic growth mode since China has been opening to the outside world, which can be featured as high growth, high investment, high export-GDP ratio, high saving and low consumption. Among the three parts of aggregate demand, however, investment and international trade may serve as a starting point of consumption. From such specific view, investment is characterized by inducing and derivative while international trade is full of uncertainty such as inconstant international market environment and the changeful competitive position in the international trade. If the domestic market is lack of forceful support from consumption, the unique ultimate factor of aggregate demand, large scale of investment could not be absorbed regularly and quickly, pushing price up and resulting in structure inflation. With the time goes by, excess production capacity and abundant inventory will appear, followed with deflation. That inflation and deflation come forth by turns demolish the economic stability. At the same time, domestic demand shortage compels Chinese economy to increase export-GDP ratio, which rely more on the growth mode driven by the investment and export. Such phenomenon is called path-dependence. So the economic growth driven by investment and export is not sustainable. Furthermore, low consumption rate is also not propitious for the social members to raise their living standards and to share the fruits of economic development since 1978.A sudden and global finance crisis has greatly restrained Chinese trade growth since the second half of 2008. Manufacturing and processing trade in the east coastal region have suffered from the shock first. With the time goes by, recession spreads out from the east to the inland and from manufacturing and processing trade to service and the other part of industry step by step through the inter-industry transmission mechanism. Conflict between consumption and investment is aggravating. In theory, it has already reached an agreement on negation of the going economic growth mode. The question is how to realize the transform from the going economic growth mode to the mode driven by the consumption, the transform from economic growth to economic development and the transform from non-sustainable development to sustainable and scientific development. What we need now may be an all-round review on the consumption and consumer behavior. It is found that consumption volatility and growth is a comparative suitable breakthrough point for both individual welfare and healthy macroeconomics.The essay is tightly around the topic of consumption volatility and growth of Chinese household, trying to answer the four questions specific to Chinese household as follows.⑴What are the style facts of consumption volatility?⑵What determines the consumption growth?⑶Why consumption fluctuates more than output does? And⑷which is more important, consumption volatility or consumption growth? Moreover, the essay pays more importance or attention to the consumption volatility than consumption growth and put the analysis into the general theory of business cycles. This is not for the reason that consumption growth is less important but for paying only attention to growth is inclined to neglect the randomicity of the consumption process. Such randomicity is highly correlated to economy stability especially in transition countries like China. It is never too late to learn clearly about the randomicity before understanding how to increase the consumption.Besides introduction and conclusion, the essay is composed of six chapters as follows. Chapter 1 is about the basic theory of business cycles. Chapter 2 contains methodology and calculation methods. Chapter 3 compiles the stylized facts of consumption volatility. Chapter 4 tests the determined factors of consumption growth. Chapter 5 reveals the real reason that consumption fluctuates more than output does. Chapter 6 compares the economic and social welfares of consumption volatility and growth.More specifically, chapter 1 is the theoretical base of the essay and gives an overview of main theoretical explanation of business cycles including traditional Keynesian business cycles theory, monetarism business cycles theory, new classical business cycles theory, the real business cycles theory and new Keynesian business cycles theory.Chapter 2 demonstrates why and how the essay uses the methods of RBC and CF filter by comparing different structure macro-econometrics and filters respectively. For the solving procedures of a RBC model is a quite difficult point in the context, chapter 2 also gives an example from data to GUASS code.Chapter 3 checks the fact that consumption volatility is about one and a half times as much as output volatility since 1978 by utilizing CF filter on both macroeconomic and microeconomic data in China. Such economic phenomenon, one of the obvious identification marks of transitional economy to differ from developed economy, always occurs in developing countries. From the perspective of consumption structure, some part of consumption between urban household and rural household has getting more and more non-synchronous since 1991, which results from the heterogeneous demand in the higher level. Urban consumption has somewhat demonstrating effect on the rural household. From the perspective of the consumption structure divided by income group, with the income increasing, urban consumption fluctuates down and up while rural consumption fluctuates down straight. Accounting for that the absolute value of rural consumption is much lower than or as much as the middle level of the urban consumption, the relationship between income and consumption about rural household just shows the first half of U-curve which reflects the relationship between income and consumption about urban household. It is likely that the consumption volatility is going to keep pace with the consumption growth when the income goes up in rural. From the perspective of Granger causality between consumption volatility and output volatility, they are mutual Granger causal and Granger effect. Comparatively speaking, the volatility transmit mechanisms in urban are much more abundant than those in rural, and urban consumption volatility transmits from individuals with higher income to those with lower income but rural consumption volatility is on the other way round.Chapter 4 presents a theoretical and dynamic panel study on Chinese urban-rural household consumption about inter-temporal decision-making individual with inner habit formation and liquidity constraint based on the stylized facts supported by previous chapter and three main behavior observations on Chinese consumer, considering a series of variables as income, consumption habit, interest rate, uncertainty, macroeconomic policies and so on so forth. What is emphasized is the asymmetric relationship between the shift of different part of consumption and income growth. The essay using provincial level panel data for the period from 1991 to 2006, it is found that both urban and rural household consumptions exhibit precaution saving intentions and excess sensitivity to personal predicted income. Comparatively speaking, urban household faces more risks than rural household and the extent of the response of total (nondurable goods) consumption to the changes in predicted income is larger (weaker) for urban household than for rural household. More specifically, the mode of urban household consumption is near to the hypothesis of"myopia"where consumption changes in proportion to the predicted income. Evidence from rural household is in favor of the"loss aversion"hypothesis where consumption changes in no proportion to the predicted income. Rural consumption reduces much when one predicts that his income is going to be low. International comparison proclaims that excess sensitivity of Chinese household is much bigger than that of American household owing to more tensive liquidity constraint, weaker upper income mobility and lower wealth for Chinese household.Chapter 5 releases one of the basic hypotheses of the traditional RBC model developed by Prescott and Kydland (1982) and Hansen (1985) by allowing two different individual behavior in one RBC model, called heterogeneous agents RBC model. The first type agent is immune to liquidity constraint and the second type agent faces a complete credit restriction preventing them to inter-temporarily transfer their income. Another two kinds of demand shocks are also learnt as government purchase shock and habit formation shock. The essay tests three main hypotheses to explain why consumption fluctuates more than output does according to the latest documents in the extended RBC model. Several related topics are also discussed including employment variability puzzle, relationship between government purchase and inhabitant consumption and investment, and some economic structure factors as income gap and consumption gap. It is found that the real reason for the problem that consumption volatility is bigger than output volatility comes from the consumption habit formation shock. To the next period consumption, the more the habit strength is, the higher the habit stock will be. If one wants to keep inter-temporal utility stable, consumption structure may be changeable and consumption volatility will be high. On the contrary, if the habit strength is small, one needs not to compensate for the consumption habit formed in the previous period. One will feel more satisfactory with the analogue consumption. Under the circumstance, consumption will be stable and smooth. Consumption consciousness awareness and industry upgrading, brought by the Chinese economic reform and social transition, make consumption change in structure, preference and habit quickly and fluctuate more than output does. The essay also rejects the hypotheses of government purchase shock and liquidity constraint. It is showed that government purchase shock will not increase consumption relative volatility to more than one until its proportion to GDP and the volatility of itself reach to a very high extent. Although liquidity constraint is not the main reason for raising consumption relative volatility, a lot of economic structure variables which may not express anything in the homogenous agent RBC mode can be learnt meaningfully by the heterogeneous agents RBC model.Chapter 6 discusses about the judgment that consumption volatility and growth are the two aspects of the same process. How can the agent weigh which one is more important? The essay uses welfare cost model of consumption volatility and growth with habit formation to compare one to the other quantitatively by means of the urban-rural microeconomic data divided by income group from 1991 to 2006. It is presented that when the agent is risk-averse, the cost of consumption volatility may be tens or hundreds times as much as that of 1% decreasing in consumption growth. Those who have different risk attitudes but nearly the same level of habit strength are probably to be in accordance with each other on accessing the importance of consumption volatility or growth. But these economic analyses are far from the needs of social development and individual goodness. What we need is social welfare analyses but not only economic analyses, which contains the relationship between consumption structure and industry structure, between consumption credit and finance innovation, between consumption growth and social security, between scientific consumption and scientific development. The essay concludes that several essentials should be attached great importance to such as to establish healthy consumption concept, to develop credit markets, to open up the rural consumption markets, to reduce to duties and fees, to increase up mobility of income, to adjust economic structure and so on.